Where Is Your Home?
Many taxpayers wanting to establish deductions for itinerant workers or employees on temporary assignments face the challenge of deductible travel, meals and lodging expenses. Procedures and guidelines are provided within the Internal Revenue Code to help determine whether a work assignment away from a worker’s regular place of employment is considered temporary.
Law and Analysis
The Internal Revenue Code allows a deduction for all ordinary and necessary expenses paid or incurred during the year in carrying on a trade or business. The deductions include travel, meals and lodging in the pursuit of trade or business while away from home. No deductions are allowed for personal, living, or family expenses.
In order for the travel, meals and lodging expenses to be allowed as a tax deductible, three conditions must be satisfied:
- The expenses are ordinary and necessary,
- The expenses are incurred while away from home, and
- The expenses are incurred in pursuit of trade or business.
Difficulty arises in the taxpayer establishing their “home” to substantiate a deduction “away from home”. The definition requires a proper analysis in order to resolve the claim by a taxpayer maintaining living quarters in two locations. One, at his place of employment, and the other in which has been established as the claimed abode which should not be entitled to deductible expenses.
A taxpayer’s “home” for travel, meals, and lodging expense purposes, has generally held to be at, or in the surrounding area of, his place of business or employment. Such location has been referred to as a “tax home”. This definition has been sustained time and again in court as the definition implies that one’s home and place of employment are generally within the same vicinity.
As it relates to the Internal Revenue Code Interpretation, a taxpayers “home” is deemed to be located where:
- The taxpayer regularly or principally conducts his business or
- The taxpayer, with no regular or principal place of business, is presumed to have a “tax home” at their usual place of abode in a real and substantial sense.
When a taxpayer is away from their regular or principal place of employment, the assignment should be considered a temporary work assignment as opposed to an indefinite or permanent work assignment. Temporary employment for this purpose should occur only if the termination of the assignment is anticipated within a moderately short period of time. The facts and circumstances will determine whether the condition gives way to a temporary stay, when employment is less than a year.
If the taxpayer, under the conditions of their employment, foresees that time “away” is greater than one year and in fact is greater than one year, then it is considered not to be temporary. Under these circumstances, the taxpayer is deemed to be away indefinitely so the taxpayer is not away from his “tax home” during a greater than one year employment.
There are circumstances in which the one year belief of indefiniteness may be rebutted, where the employment, in fact, lasts for one year or more, but less than two years. An expected or actual stay for two years or greater is considered to be an indefinite stay and not a stay away from home, regardless of the facts or circumstances.
Revenue Rulings have been issued which state that when there is a stay of one to two years, the taxpayer needs to demonstrate three objective facts in order to rebut the appearance of an indefinite stay. These facts are required to determine that there is an actual abode in a real and substantial sense to establish a tax home from which he is away from during his time of employment.
The three factors include:
- Where the claimed abode is immediately prior to the current job and the taxpayer maintains bona fide work contacts in that area during the alleged temporary employment,
- There is the manifestation of duplicated expenses at the claimed abode due to the employment away from his tax home , and
- There is frequent use by the taxpayer of the claimed abode for the purpose of lodging or family members currently residing in the claimed abode.
These are the factors used to determine whether employment of one year or more is temporary or indefinite. If the taxpayer can clearly demonstrate the probability of a short term duration of employment and the expectation of returning to the claimed abode, in addition to satisfying all three factors for the claimed abode, the Internal Revenue Service will recognize that the taxpayer is temporarily away from home. If all three factors above are not satisfied, the Service will regard the taxpayer as indefinitely employed at a new tax home and that any travel, lodging and meal deductions will be determined as nondeductible.
Sometimes, employment that the taxpayer foresees as temporary at first becomes indefinite. In such a situation, the burden of proof will lie with the taxpayer as to what expenses are determined to be deductible. Previous Revenue Rulings permitted the taxpayer to deduct ordinary and necessary travel expenses paid during the first 4 months of service as deemed to be a temporary employment. However, when the facts and circumstances indicated the taxpayer to be in an indefinite stay of employment for an additional 14 months, the expenses incurred for travel and lodging were not deductible.
Keeping accurate records of terms of contract, projected length of assignments, duplicate lodging expenses, and frequent trips to the claimed abode will help establish a temporary work assignment from home.